Chartered Financial Consultant (ChFC) Investment Planning Syllabus

Investment Planning syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Investment Planning in Chartered Financial Consultant (ChFC), not a summary of it.

1. 1

   Investment Vehicles and Markets

   4 topics

   • Equity Securities
     • Common and preferred stock
     • Stock valuation fundamentals
   • Fixed-Income Securities
     • Bond features and pricing
     • Duration and convexity
     • Yield measures
   • Pooled Investment Vehicles
     • Mutual funds and ETFs
     • Closed-end funds and REITs
   • Alternative Investments and Derivatives
     • Options and futures
     • Hedge funds and private equity
2. 2

   Risk, Return, and Portfolio Theory

   4 topics

   • Measuring Investment Risk
     • Standard deviation and variance
     • Beta and systematic vs. unsystematic risk
   • Measuring Investment Return
     • Holding period, time-weighted, and dollar-weighted returns
     • Real vs. nominal returns
   • Modern Portfolio Theory and Diversification
     • Efficient frontier and correlation
   • Asset Pricing Models
     • Capital asset pricing model (CAPM)
     • Efficient market hypothesis
3. 3

   Portfolio Construction and Management

   5 topics

   • Developing an Investment Policy Statement
   • Asset Allocation and Rebalancing Strategies
     • Strategic vs. tactical allocation
   • Active vs. Passive Management
   • Performance Measurement and Attribution
     • Sharpe, Treynor, and Jensen's alpha
   • Behavioral Influences on Investment Decisions
4. 4

   Taxation of Investments and Investment Strategies

   4 topics

   • Tax-Efficient Investing and Asset Location
   • Taxation of Capital Gains, Dividends, and Interest
   • Tax-Advantaged Investment Accounts
   • Investment Strategies
     • Dollar-cost averaging
     • Bond ladders and immunization

Investment Planning flashcards for Chartered Financial Consultant (ChFC)

20 of 59 cards from the Investment Planning deck — real questions with worked answers.

1. What are the two primary characteristics that define a common stock (equity security)?

   It represents an ownership/residual interest in a corporation, granting voting rights and a residual claim on assets and earnings (after creditors and preferred shareholders), with potentially unlimited upside and the risk of total loss.

2. How does preferred stock differ from common stock in terms of dividends and claims?

   Preferred stock pays a fixed dividend and has a higher claim on assets and earnings than common stock (but below bondholders). It typically carries no voting rights and behaves more like a fixed-income instrument; dividends may be cumulative.

3. What is the formula for the value of a stock using the constant-growth (Gordon) Dividend Discount Model?

   $$P_{0} = \frac{D_{1}}{r - g}$$ where $D_{1}$ is next year's dividend, $r$ is the required return, and $g$ is the constant dividend growth rate (valid only when $r > g$).

4. In bond pricing, what is the inverse relationship between interest rates and price?

   Bond prices move inversely to market interest rates: when rates rise, existing bond prices fall; when rates fall, existing bond prices rise.

5. Define duration and what it measures for a fixed-income security.

   Duration is the weighted-average time to receive a bond's cash flows and measures interest-rate sensitivity. Approximate price change is $\Delta P \approx -D \times \Delta y \times P$, so a higher duration means greater price volatility for a given yield change.

6. What is convexity and why does it matter for bonds?

   Convexity measures the curvature of the price-yield relationship (how duration changes as yields change). Positive convexity means a bond gains more when rates fall than it loses when rates rise, improving the duration-based price estimate for large yield moves.

7. What is the relationship between a bond's coupon rate, current yield, and yield to maturity when a bond trades at a discount?

   For a discount bond (price below par): Coupon rate $<$ Current yield $<$ Yield to maturity. For a premium bond the inequality reverses; at par all three are equal.

8. What is a mutual fund's Net Asset Value (NAV) and how is it calculated?

   $$\text{NAV} = \frac{\text{Total Assets} - \text{Total Liabilities}}{\text{Shares Outstanding}}$$ Open-end mutual funds are bought and redeemed at NAV, calculated once at the end of each trading day.

9. How does an ETF differ from an open-end mutual fund in trading and tax efficiency?

   ETFs trade intraday on an exchange at market prices (which can differ from NAV) and use an in-kind creation/redemption process that minimizes capital gains distributions, making them generally more tax-efficient than mutual funds, which trade only at end-of-day NAV.

10. What is a closed-end fund and how can its price relate to NAV?

    A closed-end fund issues a fixed number of shares that trade on an exchange. Its market price is set by supply and demand and can trade at a premium or (more commonly) a discount to its NAV.

11. What is a REIT and what is its key distribution requirement?

    A Real Estate Investment Trust pools capital to own/finance income-producing real estate. To maintain its tax status it must distribute at least 90% of taxable income to shareholders as dividends, which are generally taxed as ordinary income.

12. Distinguish a call option from a put option.

    A call gives the holder the right (not obligation) to BUY the underlying at the strike price; a put gives the right to SELL at the strike. Call buyers are bullish; put buyers are bearish.

13. What is the difference between a futures contract and a forward contract?

    Futures are standardized, exchange-traded, and marked-to-market daily through a clearinghouse; forwards are customized, private OTC contracts with counterparty risk and settlement at maturity.

14. What distinguishes systematic risk from unsystematic risk?

    Systematic (market) risk affects the entire market and cannot be diversified away (e.g., interest rates, recessions); unsystematic (specific) risk is firm/industry-specific and CAN be eliminated through diversification.

15. What does standard deviation measure as a risk metric, and what is its formula?

    Standard deviation measures total volatility (dispersion of returns around the mean). $$\sigma = \sqrt{\frac{\sum_{i=1}^{n}(R_{i} - \bar{R})^{2}}{n-1}}$$ A higher $\sigma$ indicates greater total risk.

16. What does beta ($\beta$) measure and what do values of 1, >1, and <1 indicate?

    Beta measures systematic risk relative to the market. $\beta = 1$ moves with the market; $\beta > 1$ is more volatile than the market; $\beta < 1$ is less volatile; $\beta < 0$ moves opposite to the market.

17. How is beta calculated using covariance?

    $$\beta_{i} = \frac{\text{Cov}(R_{i}, R_{m})}{\sigma_{m}^{2}} = \frac{\rho_{i,m}\,\sigma_{i}\,\sigma_{m}}{\sigma_{m}^{2}}$$ where it equals the covariance of the asset with the market divided by the market's variance.

18. What is the coefficient of variation and what is it used for?

    $$CV = \frac{\sigma}{\bar{R}}$$ It measures risk per unit of return (standard deviation relative to mean return), allowing comparison of relative risk between investments with different expected returns; lower is better.

19. What is the formula for the holding period return (HPR)?

    $$HPR = \frac{(P_{1} - P_{0}) + \text{Income}}{P_{0}}$$ the sum of price appreciation plus income (dividends/interest), divided by the beginning price.

20. Distinguish the arithmetic mean return from the geometric mean return.

    The arithmetic mean is the simple average of periodic returns (good for estimating a single future period). The geometric mean is the compound annual growth rate, $\sqrt[n]{\prod(1+R_{i})} - 1$, which accounts for compounding and is always $\leq$ the arithmetic mean.

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